09.07.2015It's your super, so why shouldn't you be allowed access?

The latest Productivity Commission report, Superannuation for Post-Retirement, highlights two aspects of post-retirement income policy that have recently attracted considerable attention: the age at which people should be able to access their superannuation, and whether lump sum withdrawals should be restricted.

Preserving superannuation

The preservation age, which is the age at which a person who retires can access their superannuation, is set by superannuation regulations, and is currently between age 55 for a person born before 1 July 1960, and age 60 for a person born after 1 July 1964. Anyone who reaches the age of 65 can access their super without retiring.

The preservation age has always been lower than the age at which a person becomes eligible for the age pension. In 1997, when the current preservation age was set, a person became eligible for the pension at age 60 (for women) or age 65. Therefore there was a five year gap during which a retiree could draw on their superannuation to support themselves before becoming eligible for the pension. However, superannuation balances were much lower at that time: in 2000 the mean superannuation balance for a male over the preservation age was A$44,700, and for a female was A$19,800. With lower balances, there was less incentive to retire early.

The gap of five years between preservation and pension age has now extended to seven years. From 2017 the pension age will be 67 for both men and women, and as superannuation balances have increased, in recent years there has been concern that retirees will retire earlier, living off accumulated superannuation until they reach age pension age. This could reduce workforce participation among people in this age group, which would impact on productivity in the National Accounts; and would also increase the cost of the age pension as superannuation savings are exhausted before pension age.

The Productivity Commission found that there could be a fiscal saving of about A$7 billion by 2055 if the preservation age and the pension age were to be synchronised. Most of this would be from additional tax paid by higher income households.

The losers

However, there are other factors in the report that could equally be used to argue against the proposition.

Firstly, the increase in workforce participation would be relatively small, about 2%, and most of this would be from workers who are already more likely to continue to work beyond the age pension age: those with higher wealth who are more likely to be in managerial or professional positions.

Secondly, the impact of deferring the preservation age is likely be felt most severely by workers who take involuntary retirement, about half of all Australians between the age of 45 and 70. If these retirees are unable to access the superannuation they have accumulated, they will be forced onto other forms of government benefits that are generally lower and more restrictive than the age pension.

Overall, a change to the preservation age is likely to have a regressive effect on retirement incomes. High-income earners would work longer, save more and access higher incomes when they do retire. Lower-skilled workers, who are more likely to face involuntary retirement, would have lower superannuation balances and would be unable to use those balances to supplement income from other benefits while waiting for the age pension.

Transition to retirement

There is, however, a case to change the current transition to retirement pension arrangements.

Under the current rules a person who has reached preservation age can access some of their superannuation without formally retiring if they enter into a transition to retirement scheme. Although this was conceived as a good way to allow people to reduce their working hours in the lead up to formal retirement, in practice it has become a way for high-income earners to maximise superannuation concessions without reducing their working hours. The Productivity Commission has joined other critics of this arrangement that seems to be used primarily as a tax-saving measure.

The lump sum myth

The second issue addressed in the report is the myth of the lump sum. It is frequently said that Australians take a lump sums from their superannuation to fritter away on lifestyle assets such as holidays. However, this is not supported by the evidence of how people access and use their super.

There is a clear preference for people with lower superannuation balances to withdraw significant lump sums when they retire (see chart below).

Because lump sums are generally less than A$20,000, taking the lump sum does not have any impact on eligibility for the age pension. Members with higher balances are increasingly likely to convert their balance to an income stream, which is now tax free.

Where a lump sum is taken it is generally used to pay down debt, including mortgages, or to purchase durable goods like cars at the start of retirement. About half of the lump sums taken from superannuation are used in this way. About another third are converted to a different form of financial asset: an annuity is purchased or the money is invested or rolled over to another form of deposit.

All of these uses of the lump sum preserve the wellbeing of a person in retirement. Only 7% of lump sums taken are used for a holiday.

The Productivity Commission has conducted analysis, as opposed to a report with recommendations. It does note that any such decisions are a matter for the government to decide. In this instance, perhaps the current government mantra of no change to superannuation can be justified.